The allusion that this brings to mind is that of Odysseus (the investor) resisting the Siren call (the market). Just as the crafty Greek hero – who was well aware of his own inability to resist the appeal of the Sirens’ music insisted his own crew restrain him – so too Passive and Factor investors recognize that, by forcing themselves to be rules-based, they also can avoid the temptation to change their strategies during volatile times.
And, of course, this philosophy, is the main reason for the other bullet – “Low Cost”. Given the relative simplicity of adhering to a pre-determined strategy, and not continually needing to research and reevaluate positions, it’s no surprise that Passive and Factor based investing tends to cost less than traditional Active management.
The last comparison is with Alternatives, and what remains top of mind here, given the vast bucket of strategies labeled in this way represent strategies that undertake factor investing, but without a passive guise. For example, they may not track a factor-based index, or be subject to such rigid restrictions.
Clearly “Alpha Capture” is a shared goal given their similarities, but what about the “Cutting Edge Exposures” we refer to? Well, these really serve as recognition of Factor investing’s roots in some of the highest echelons of academic finance. Many well-known factors have been uncovered by researchers at universities and business schools, and were originally adopted by firms that had founders or employees linked to these institutions. Today, the systematic nature of such factors has translated nicely across passive approaches, giving many more investors the ability to easily access this “Cutting Edge” heritage – hence our overlap.
In our view, these are some reasonable arguments to suggest that Factor investing sits at the intersection of Active, Passive and Alternative approaches. Ultimately, whether one entirely agrees with this framework or not, at least it provides some suggestions around the right questions to ask when considering factor investing.
Bottom Line
Factor investing arguably sits at the intersection of the Active, Passive and Alternative pillars, and combines many of the best attributes of each.
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